Limited commitment, money, and credit (Q5947390)

From the authors' concluding section: A model in which private liabilities can be used to facilitate intertemporal trade, but suffer from limited commitment and adverse selection, has been studied. It is shown that when combined with adverse selection the limited commitment problem affects the behavior of safer borrowers more severely than that of riskier ones. By contrast, in the absence of adverse selection the limited commitment problem affects riskier borrowers to a greater extent\dots\ . It is shown that a credit market may perform worst under common knowledge than under private information. In particular, a common knowledge credit market may fail to deliver a nontrivial equilibrium of a type that could exist it an analoguous situation under private information.